Analyst Greg Drahuschak explains that despite recent market turmoil, the equity market is at a level that offers significant opportunities.

Recent market turmoil about the coronavirus (COVID-19) shoved the S&P 500 into bear market territory, as the S&P 500 was down more than 20% from its most recent high (3393.52).

Hundreds of Wall Street reports have attempted to assess the ultimate impact of the virus on the economy, but they each recognize that it is impossible to determine with any degree of certainty what the eventual outcome will be. Similar situations in the past eventually were resolved by the equity market recovering all of its losses. This, however, does not take away from the angst investors have now.

A chart shows S&P 500 high

The current market sell-off is following a familiar script. As the chart on the left shows, no S&P sector has been exempted from losses. The initial pullback from the February 19 high was slow, but it accelerated when the S&P 500 broke through its 50-day moving average and quickly sank to its 200-day moving average. For six trading sessions, the S&P 500 traded around its 200-day average in hope that this typical level of market support would stem the selling. As news on the virus grew worse, the S&P gapped lower multiple times. The more than 20% drop from the high was the fastest on record. The market expects that earnings for 2020 are likely to fall sharply from the current $171.81 estimate.

With the S&P 500 falling as low as 2508.93 on March 12, we think the market already has discounted the potential for a minor recession. Technical factors offer some guidelines about where an eventual low will be, but completely relying on them is a mistake. However, the recent selling has created extremely stretched internal market conditions that often lead to a rebound. For example, in multiple trading sessions recently, more than 90% of all stocks on the New York Stock Exchange were down, which is a highly unusual circumstance.

We believe that the market is setting up for an eventual recovery that could erase most and possibly the entire drop from the high.

Precisely timing the recovery is difficult, but the equity market is at a level that offers significant opportunities, as valuations have fallen sharply and yields available in quality common stocks have risen to compelling levels. We advocate gradually staging idle cash into stocks at this time, as the market gradually begins to look toward the eventual recovery.

Disclaimer
Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.

This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

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